How do engineers know if they’re being screwed on compensation and equity?

I recently met with an engineer who’s taken on CTO responsibilities for a very early-stage startup. Because the startup has been around for a while and initially tried to build the v1 product with an outsourced dev shop, she’s not a ‘founder’ and thus doesn’t have significant compensation (neither salary or equity). She had a number of questions, but one that I’ve heard repeatedly went something like this — “How do I know if I’m being screwed by the founder in terms of compensation and equity?”

There’s no perfect answer to this. Obviously you’d want to check with your peers, but people often aren’t comfortable disclosing their own income for fear of finding out they’re out of whack, in either direction. And their salary and equity can be significantly different than yours for valid reasons (i.e. if they founded the company, they may be taking little to no cash compensation since they own 50% or more of the company). And you’d definitely start by checking industry comps at sites like GlassDoor, Payscale and new LA-based startup Comparably (co-founded by serial entrepreneur Jason Nazar). It was a total coincidence, but a Cheddar interview with Jason popped up on my Facebook feed today — click on this image to hear Jason talk about Comparably and salary comparison:

That information will help get you in the ballpark, but honestly, as is usual, the answer is “it depends”. There are many reasons that you may be justifiably underpaid. Just because your CEO may seem to be underpaying you doesn’t make them evil; they’re balancing the needs of many shareholders, and trying to anticipate unknown risks. My goal is to pay people (and issue equity) at levels that keep them both happy and motivated. Ultimately, you need to decide if you feel like the pay/equity/experience/risk/reward tradeoff works for you, and you need to build your network to give you options.

These are a few of the payroll/equity factors that make it an ‘it depends’ situation:

The startup is not well funded. If they still haven’t raised much/any money, they may not be able to compensate you at market rates. In that situation, you could work with the founder to make sure that cash shortfall is offset with either deferred salary (payable after funds are raised) or extra equity to compensate for the imbalance.

You may be inexperienced. If you’re in a situation where you’re drinking from a firehose and being given a chance to grow in many dimensions, part of your total compensation could be the value of that added experience and the opportunity to rapidly advance in a fast-growing company. There are many stories about early employees at places like Uber where they came on board, took on myriad responsibilities, and are now senior managers (and future billionaires). And I saw this firsthand during my early product management years at Amazon when I was given immediate opportunities to lead products/projects that future product managers would have to pursue for many years before given the same opportunities.

If you’re fairly paid, but under-equity’d, it may just be a timing issue. Extremely early employees deserve more equity because they took a lot more risk. Whereas if you’re coming in a year later (after a Series A fundraise has occurred), there’s a lot less risk and thus you likely aren’t going to get the same equity as employees who are doing similar jobs. It sucks, but that’s the way it is.

Your geographic situation matters. This should be obvious, but employees in San Francisco, New York and London get paid a lot more than those in Portland, Pittsburgh and Berlin. So, try to compare apples to apples.

How can you improve your compensation situation?

Do your research and have the honest/open discussions with your boss. Then, either get comfortable with your situation as quickly as possible, or move on (assuming you have other opportunities). Obviously, you need to be able to walk away. Don’t stay in a bad work marriage. It’s unlikely to fix itself with time.

If you’re evaluating a position similar to the one the CTO got herself into, sign on as a contractor for 3 to 6 months. That gives you time to demonstrate your ‘founder-ness’ to the CEO before you talk specifics on equity. This way the CEO will know what they’re giving up if you leave because they aren’t willing to pony up for founder-level equity. Of course, it also gives you a lower-investment opportunity to evaluate the CEO and company as well.

This particular person was also a recent London transplant, so her network wasn’t very established. I recommended that she connect with a few of the active and respected local seed-stage VCs (LocalGlobe, Notion Capital) and accelerators (Seedcamp, Techstars, Entrepreneur First). They ALWAYS have teams that are in need of technical leadership. But don’t go looking for a job. Rather, volunteer to assist their teams with technical issues/questions and get to know a host of companies. Then, when the light bulb goes off for the startup/investor and they want to make you a CTO/founder offer, they’ll be much more willing to pony up market-rate equity and salary. That’s both because they have the funding to do it, and also because they already KNOW you’re a good fit. Plus, you may land yourself with a higher-likely-success situation because they’re backed by savvy investors with strong support structures.

Comments

I think an important factor for anyone in this situation is to 'know your number'. You touched on it briefly in terms of researching what others are getting in similar roles (I.e. market value) but that is only half of the equation. You need to understand your minimum number in terms of the cost to live/survive to properly asses short term and arguably long term risk. This might be obvious to those in startup land, but a lot less obvious to those thinking about getting into startup land that have had a regular salary and have built a certain lifestyle: the number truly has to be your minimum which is not necessarily what you are spending now.

That's an awesome point. I skipped over the fact that people shouldn't be forced to be homeless for the 'privilege' of working for said startup! Also, I often tell corporate types who are interested in moving to a startup to adjust their burn rate (aka things they spend money on) many months ahead of time. That not only helps them build up savings to live off of, but also ensures that they're committed to the change and aren't unhappy about it when it happens.